Risk of UK default set to soar if Italy defaults

The risk of a British default has soared alongside the fears that Italy may
not be able to service its debt, analysts have warned.

At the moment the price of insuring Britain's debt - through credit default swaps - implies a 9pc chance of default. But Fathom said: "If Italy were to default, the probability of a UK default would rise to 22pc."Photo: PA

The chances of Britain being left unable to service its debt would jump to one in five in the event of an Italian financial collapse, according to a note by Fathom Consulting.

At the moment the price of insuring Britain's debt - through credit default swaps - implies a 9pc chance of default. But Fathom said: "If Italy were to default, the probability of a UK default would rise to 22pc."

The cost of government borrowing would also go up by around 2.5 percentage points.

Italy's cost of borrowing pushed through the 7pc level yesterday raising fears that it will not be able to service its €1.9 trillion (£1.6 trillion) debt pile.

A French default would be even more serious - the risks and the cost of UK government borrowing "would roughly double", according to Fathom.

Britain has managed to remain relatively unscathed by the turmoil of the Greek debt crisis. But the UK has far stronger and more important economic ties with both Italy and France.

Italy is Britain's eighth biggest trading partner. In September, Britain exported £803m of goods to Italy and imported goods worth £1.2bn according to the latest figures from the Office of National Statistics.

France is Britain's fourth biggest export market worth £1.7bn in September. The UK also has the third largest bank exposure to Italy holding an estimated total of €49bn (£42bn) of sovereign debt.

Andrew Brigden of Fathom said: "If Italy defaults, British banks would be hit hard which could lead the a requirement for them to be bail-out by the Government."